Rallying techs aid convertibles

By Peter Heap

New York, Nov. 5 - A strong rally in technology stocks helped lift the convertibles market Monday. Meanwhile the calendar of upcoming deals remained thin although there was talk of plenty more issuance waiting in the wings, possibly once Tuesday's Federal Open Market Committee meeting is out of the way.

Gains in the telecom and technology sector were supported by two key factors: Sprint's announcement that its local telecommunications division will buy $1.1 billion of packet-based equipment from Nortel Networks and expectations that Cisco Systems Inc. would beat analysts' forecasts for its earnings. The equipment giant did just that, reporting earnings for the first quarter of fiscal 2002 of four cents a share, against predictions of two cents.

The Dow Jones Industrial Average rose 117.50 or 1.3 to 9441.00 while the Nasdaq climbed 47.92 or 2.7% to 1793.65.

Both convertibles and the underlying stocks responded favorably. For example, one source saw Ciena Corp.'s 3¾% convertible due 2008 closing at 631/4, up 1 3/8 on the day, while the underlying stock gained $1.83 to $16.92. Juniper Networks' 4¾% due 2007 went out at 71 1/8, up 1¾ on the session, while the stock added $3.10 to $22.58.

The good performance of technology names along with the market's resilient response to the weak National Association of Purchasing Managers non-manufacturing index data prompted Catherine Kusuma, convertibles analyst at UBS Warburg, to say now could be a turning point.

"I think we might be seeing a beginning of sector rotation back into growth," Kusuma said.

Describing the response - or, rather, lack of it - to the NAPM services data as "encouraging," Kusuma added: "It just feels like the market is bottoming out."

She also noted that stocks typically rally six to nine months ahead of an economic recovery, giving a rationale to investors' lack of response to the weak economic data.

If the market - and, in a little further into the future, the economy - is coming back, then investors should be moving into growth stocks, she added, although she pointed out that telecommunications service providers are sitting out the recent rally. Doing better are the equipment providers, the top-tier component makers and the equipment makers.

She noted that 1/3 of the U.S. convertibles universe falls into the growth category, with technology still accounting for 20% of the market and telecom for 15%.

Not everything was positive, however. Baxter International Inc.'s convertible, like its stock, was hit hard after the company said it was withdrawing two models of dialyzer after it linked a fluid used in production to recent unexplained deaths. The company expects to record a $100 to $150 million charge in the fourth quarter as a result.

Baxter's 1¼% convertible due 2021 was seen closing at 1011/2, down 1 1/8 while the stock fell $2.67 to $46.33.

In the primary market, the calendar remained thin Monday with just two deals scheduled.

ATMI, Inc. was expected to price $100 million of Rule 144A convertible subordinated notes due 2006 after the market close Monday. Talk puts the deal at a yield of 5¼% to 5¾% and the initial conversion premium at 21% to 25%. Goldman, Sachs & Co. is managing the sale.

Although a small deal and not one of the better known names in the semiconductor equipment sector, Danbury, Conn.- based ATMI could do well, according to one market source, because of the relatively high yield, which will appeal to buyers who are sated with the large number of zero-coupon deals so far this year, the relatively low conversion premium, appealing in a market where many securities are trading way out of the money, and its relatively short maturity.

The other deal on the calendar at present is $125 million of convertible preferreds for Chesapeake Energy Corp. via Credit Suisse First Boston and Bear Stearns & Co. Talk is for a yield of 6¼% to 6¾% and an initial conversion premium of 21% to 26%. Pricing is expected after the market close Tuesday.

"It'll be a decent deal," one trader commented. Referring to the recent flow of energy deals in both the convertibles and high-yield bond markets, he added: "People want it and have cash, so they'll price if they can do it."

The "very small" calendar continues to cause some surprise, given investors' enthusiasm for new deals, especially compared to the mostly busted items on offer in the secondary.

One source suggested that once the Federal Reserve meeting Tuesday is passed, more deals could surface.

"Every investment bank has a large backlog," added another.

End

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